Hospitals administrators whose institutions are looking to sell tax-exempt bonds or renew lines of credit with banks to back variable-rate debt had better be prepared to spend more time accounting for their performance and explaining those numbers to outside observers.
More scrutiny expected on bonds, credit lines
Andrew Majka, chief operating officer for healthcare financial adviser Kaufman, Hall & Associates, said during a presentation at the American College of Healthcare Executives in Chicago this week that a host of factors are causing the changes, which are going to require more work on their part.
But before hospital executives get defensive about having to justify their financial performance, they should think about the situation from the perspective of the bond buyer.
Not-for-profit healthcare bonds often look like a very risky place to park money, even to the experts who understand it well. For example, one bond-rating firm Majka highlighted has issued more credit downgrades than upgrades in 17 of the past 21 years for not-for-profit hospitals. And by placing the ratio of downgrades to upgrades on a graph by year, it becomes clear that the downgrades tend to spike whenever federal lawmakers start proposing changes to Medicare reimbursement, such as what's happened in the past year.
Meanwhile, 2008 saw a far more severe ratio of negative to positive changes than in past years because hospitals were already in the midst of three full cycles of declining operating performance when the credit crisis hit and collapsed the $330 billion auction-rate bond market on which hospitals had heavily relied.
That collapse caused scores of cash-hungry hospitals to float variable-rate demand bonds backed by letters of credit from banks. However, banks in many cases would grant only three-year guarantees, which created a surge of expiring letters of credit that expire in 2011. This year, $4.3 billion in letters of credit are coming up for renewal, while in 2011 the total is $14.4 billion, as reported in Modern Healthcare earlier this month.
At the same the time, the bloc of large institutional buyers that used to buy up nearly the entire market for hospital debt has begun to give way to scores of individual buyers who are climbing out of the woodwork to buy the debt. An increasing number of hospitals have even begun to receive loans directly from banks, avoiding the bond market altogether, Majka said.
Regardless of what they think of these alternatives, it all means that hospitals should be prepared to spend more time on creditworthiness inquiries than ever before, including preparing quarterly earnings statements and taking the time to explain to retail bond buyers and skeptical banks why their history and projections for operational performance justify extending credit, Majka said.
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